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It's About More Than Money: Why Investors Switch Advisors

You would think it would be simple to keep an investor client: a wealthy client is a happy client, and increasing the size of their portfolio with regularity should do the trick.

But investors have other demands of their financial providers and advisors beyond just making them money.

Spectrem’s research study, Why Investors Switch Advisors, looks at what types of investors are most likely to switch advisors, and more importantly, what aspects of the advisor-investor relationship is most likely to trigger a desire to change.

“Certainly, an investor wants an advisor who can increase the size of his portfolio with good advice and ideas,’’ said Spectrem President George H. Walper, Jr. “But investors want to maintain a consistent line of communication with their advisor, and want to know they are being made aware of changes in the stock market or other business areas. If those needs are not met, investors will find someone who will meet their needs.”

Most advisors are already aware that investors are likely to seek different advisors over the course of their lives. According to the Spectrem study, only 42 percent of investors have never switched advisors. Among the oldest investors surveyed for the study, those 69 years of age and older, only 38 percent have never switched advisors.

Obviously, an investor will look to make an advisor switch if they are not happy with the direction their investment funds are going, or the growth (or lack thereof) of their portfolio. Wise investors are aware how the stock market as a whole performs, and can do the math with their own investments to see how they are faring in comparison. Most investors can be somewhat forgiving if the markets are crashing and they realize that is the primary reason their portfolio is going down.

But there are investors who do not do the math. They are looking for other behaviors in the relationship, and if those behaviors do not match their preferences, they will consider a switch.

Chief among them is contact. In general, investors like to hear from their advisors. Among investors who have switched advisors, the reason most often stated (24 percent) was that the advisor was not proactive in contacting the investor when there was information the investor could use. That topped investment performance related to the stock market as a whole (22 percent) and just edged out advisors who do not provide good advice and ideas (23 percent).

The upshot of that research is that, as an advisor, you really cannot make too much contact with your investors, unless an investor precisely states the regularity with which they want to hear from you.

The study looks at more than 10 other reasons, including those related to fees, understanding risk tolerance, and returning phone calls or e-mails. Also included is a detailed look at the investors who switch advisors for a specific reason; for instance, those most likely to switch advisors due to under performance are usually older, wealthier, have significant assets in mutual funds and do their own research by reading financial articles and accessing information on financial websites.

The relationship between an advisor and a knowledgeable investor is a tricky one. Overall, informed investors are more likely to switch advisors. Those that read financial articles or financial blogs are more likely to switch than those that do not, and the widest disparity is among those who visit major financial media websites such as CNBC and Fox Business.

“The most important findings of this report clearly indicate that investors that like to self-educate themselves and follow the markets are more likely to change advisors than those who like to just discuss issues with their advisors,’’ Walper said.

Top Takeaways for Advisors

It might not be a bad idea to ask investors the question “What is most important in our relationship, that will keep you working with me for years to come?” If the answer is solely based on investment performance, you can concentrate on that aspect of the relationship. If, however, the answer involves communication, you need to know just how much communication the investor wants, and what information he or she wants from you.

If an investor leaves your firm, it would behoove you to find out why. Client satisfaction surveys can certainly prevent departures, but direct questions to investors who are leaving are the best way to get the information that can prevent future departures.

Regardless of the answer of whether communication or investment performance is most important, assume both are. Unless the investor says they don't want to be contacted frequently, assume that more is better until the relationship is established enough that one can tell based upon their actions and responsiveness.

Be aware of what is being discussed on the cable news channels. Many investors are influenced by what they hear and may ask you questions based on what they have viewed. If you have opinions about or are aware of some of the "hot" issues, your client is more likely to be satisfied that you are "up to date" regarding what is happening.

*According to Spectrem research, there are currently 29.8 million households with $100,000 - $1 million in net worth (not including primary residence, NIPR). There are 9.1 Millionaire households ($1 million - $5 million net worth, NIPR), 1.21 million Ultra High Net Worth households ($5 million - $25 million net worth, NIPR) and 145,000 households with more than $25 million in net worth, NIPR.